Although Southeast Asia is an emerging economy with a population of 650 million, about 80% of the population still has no bank account; in contrast, China's ratio is significantly lower than about 20%, and its huge population (about 2.25 billion people) is enough to make China a mature market.
As there are not enough opportunities to obtain mainstream financial services provided by retail banks, this group of individuals can only trade in cash, and they cannot obtain credit cards, loans, mortgages and other financial tools.
However, in emerging economies, these people can provide much-needed growth to the economy through remittances. For example, China is the second-largest recipient of remittances, having received US$67.4 billion in remittances in 2018. In Southeast Asia, the Philippines and Vietnam are also listed as the top ten remittance countries in the world.
This year, the total amount of digital inward remittances in Asia will reach US$26.18 billion, and it is expected to grow at a compound annual growth rate of 17% to US$42.16 billion by 2023. Improving barrier-free facilities and reducing costs will greatly benefit the industry. To date, the average cost of remittances has been 7%, and one of the UN Sustainable Development Goals is to reduce this to 3%. Fintech players can work with a variety of institutions to make payments and other financial services cheaper and more accessible.
"According to the World Bank report, banks and post offices are the most expensive remittance channels, with fees as high as 11% and 7% respectively. Such high remittance costs weaken the benefits of globalisation,” said Victoria Krapivina, head of business relations at Elevate Ventures. “Millions of migrant workers continue to pay high transfer fees as they have no choice but to repatriate funds to their home countries. Therefore, sustainable development requires more efficient and cost-effective financial services.”
Addressing the challenge of fragmentation through partnerships
Even with the increasing popularity of digital payment platforms, cash transactions still dominate Southeast Asia. “Although cashlessness is one of the main themes of developing a mobile economy in Southeast Asia, we still see a strong dependence on cash throughout the business cycle,” said Saemin Ahn, managing partner of Rakuten Ventures. Rakuten Ventures is an early stage corporate venture capital fund focused on enhancing the startup ecosystem to influence global Internet services. “In China, with the strong support of the government and unified regulatory agencies, cashless transactions have achieved an 80% market penetration.”
Tranglo CEO Jacky Lee believes that fragmentation is one of the biggest challenges in achieving the cost-effectiveness of cross-border payments and capital transfers. This involves management frameworks and technical solutions. “The biggest regulatory challenge is that each country has its own set of regulatory requirements, including differences in withholding taxes, double taxation status, compliance requirements, foreign exchange restrictions, etc.,” said Jacky Lee.
Similarly, a World Bank research has shown that remittance fees often include premiums for the establishment of an exclusive partnership between the postal system of the host country and the remittance operator. “Renegotiating exclusive partners and allowing new participants to operate through national post, banks and telecommunications companies will promote competition and reduce remittance fees,” the study suggests.
Tranglo is a company that provides seamless cross-border payments. It does this by finding local partners to provide its users with a more seamless, secure and convenient way to send money across borders. For example, the company has established partnerships with Alipay and WeChat Pay HK so that companies can make cross-border payments through the above channels. Jacky Lee said: “We seek to establish partnerships with reputable payment touch points around the world so that remittance players can save on operating costs, increase liquidity, and give it back to consumers in terms of better and more cost-effective services.”
How Digital Transactions Boost Economic Development
Reducing the cost of digital transactions such as cross-border payments and remittances will benefit migrant workers who need to send money back to their home countries. Not only that, there will be greater benefits for the entire region. It will open the market for small businesses, which can now cater to larger regional or global customers through digital products or cross-border customer services, as even when paying through traditional channels such as credit cards, there are no strict banking requirements and corresponding necessary procedures.
According to a 2019 report by Google, Temasek, and Bain & Company, the digital payment ecosystem in Southeast Asia will grow from the current US$600 billion to US$1 trillion by 2025. It is expected that the Internet economy will account for a large part of this — almost half will come from Internet-driven services such as e-commerce, bike sharing, etc. E-wallets are expected to grow at a faster rate, from US$22 billion in 2019 to US$114 billion in 2025.
“The region’s large unbanked population is a rare opportunity for fintech companies and startups, and existing digital trading platforms have had a huge impact on this group,” Krapivina noted.
As partnerships deepen, cross-border transactions will become easier and more cost-effective, and this is the best time for these companies to seize this opportunity to achieve economic growth and financial inclusion.
This article is translated from the original version that appeared on Forbes China.
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